For instance, the joint venture may interact with foreign government officials or employees of a state-owned enterprise; then leverage those relationships for an improper benefit either contracts, regulatory licenses, permits or customs approvals. It is difficult to regulate a joint venture’s interactions with foreign government officials when you partner is a state-owned enterprise, or where your company is relying on the local company for its local contacts and expertise for business development and/or regulatory knowledge and experience.
The risks are compounded when the US company does not exercise control of the joint venture. This is further compounded by the fact there is no minimum threshold for a FCPA enforcement action against a US company for the actions of a joint venture in which it holds an interest. If a company holds something less than majority rights, it must to urge, beg and plead for the majority partner to adhere to anti-corruption compliance standards and controls. Often, these requirements are established in the joint venture agreement but the success in securing such contract protections depends on the importance of the global company to the joint venture itself.
Another set of issues comes from the joint venture when it seeks to retain third party agents and/or distributors. Depending on the amount of control, the US company usually can impose its set of standards for conducting due diligence of third party agents and distributors. These risks become more difficult when the joint venture partner brings to the joint venture a proposed third party agent or distributor and vouches for the agent or distributor. If the joint venture partner is a state-owned enterprise, the issues become even more complicated as such referral creates an obvious red flag for a government-sponsored referral.
Now add on the fact that the foreign joint venture partner may not be proficient in English as a first language. The US company may not have financial personnel with requisite language skills in the foreign country. Some companies have a policy that English will be used throughout the world in its business dealings. However, even with such an English only policy in place, the risks represented by such lack of effective oversight by the multinational extend not only to potential FCPA violations, but to other corrupt acts, including kickbacks, fraud and theft.
At this point you have engaged in due diligence prior to the create of the joint venture agreement. The agreement itself has a robust set of compliance terms and conditions, including the right to audit. Mike Volkov has called the exercise of the right to audit one of the key elements in the risk management process around joint ventures. He advocates that any audit take a deep dive into the payments made by the joint venture to a wide range of persons and entities, including agents, suppliers, customers or any others. This would be particularly important for payments made to do business or otherwise operate legally in the joint venture’s locations. This means there should be an inspection of the joint ventures books and records to see if facilitation payments are properly recorded as facilitation payments.
Volkov noted that one interesting area which requires greater review is around payments to colleges or universities outside the US. If there are payments for research or other projects you need to audit the payments and services with an eye towards determining that the rate paid is not out of line with the local payment rate. The same holds true around gifts and entertainment as the local tradition of your foreign partner may be quite different than the expectations of an American company operating in a country such as China.
Another area for audit is if the foreign partner receives a management fee, which can be used for improper purposes. Several FCPA enforcement actions were based on this or similar payment schemes. Such fees may simply be based upon a percentage of joint venture revenue or profit, and often are not required to correspond to defined tasks, or specific efforts or hours. Most usually, there are no substantive billings associated with such fees, they simply become due. Under this type of arrangement, it is almost impossible to justify this fee if requested by the DOJ. If the foreign partner does receive such a fee, this will need to be closely scrutinized in the audit process.
Volkov advocates using a wide-range of investigation techniques in any audit of a foreign joint venture. He said that a trip to the joint venture headquarters is mandatory, as are onsite interviews with key joint venture personnel such as joint venture CEO, CFO, head of audit, head of HR and compliance. A key interview is always the head of sales for the joint venture and any head of sales who might deal with foreign governments or state-owned enterprises. Phone interviews can be used to supplement these in person interviews where appropriate.
Volkov stated that “what we were trying to put together was a product that can stand up to subsequent scrutiny, particularly by the Justice Department and the SEC.” Yet there are other key reasons for the audit; these include education, training and communication. Every time you meet with someone, you have the chance to not only listen to them but give them information on the compliance program and expectations thereunder. Equally important is the ease and (hopefully) comfort the participants in the joint venture will feel about your compliance efforts and their compliance obligations going forward.
As a baseline, I would suggest that any audit of a joint venture include, at a minimum, a review of the following:
- the effectiveness of existing compliance programs and codes of conduct;
- the origin and legitimacy of any funds paid to Company;
- books, records and accounts, or those of any of its subsidiaries, joint ventures or affiliates, related to work performed for, or services or equipment provided to, Company;
- all disbursements made for or on behalf of Company; and
- all funds received from Company in connection with work performed for, or services or equipment provided to, Company.
If you want to engage in a deeper dive you might consider evaluation of some of the following areas:
- Review of contracts with joint ventures to confirm that the appropriate FCPA compliance terms and conditions are in place.
- Determine that actual due diligence took place on the joint venture.
- Review FCPA compliance training program; both the substance of the program and attendance records.
- Does the joint venture have a hotline or any other reporting mechanism for allegations of compliance violations? If so how are such reports maintained? Review any reports of compliance violations or issues that arose through anonymous reporting, hotline or any other reporting mechanism.
- Does the joint venture have written employee discipline procedures? If so have any employees been disciplined for any compliance violations? If yes review all relevant files relating to any such violations to determine the process used and the outcome reached.
- Review employee expense reports for employees in high-risk positions or high-risk countries.
- Testing for gifts, travel and entertainment that were provided to, or for, foreign governmental officials.
- Review the overall structure of the joint venture’s compliance program. If the company has a designated compliance officer to whom, and how, does that compliance officer report?
- How is the joint venture’s compliance program designed to identify risks and what has been the result of any so identified?
- Review a sample of employee commission payments and determine if they follow the internal policy and procedure of the joint venture.
- Regarding any petty cash activity in foreign locations, review a sample of activity and apply analytical procedures and testing. Analyze the general ledger for high-risk transactions and cash advances and apply analytical procedures and testing.
Finally, is your follow up after the audit. If there are any red flags which were not fully investigated during the audit process, that must be accomplished in this phase. Additionally, if there were action items for remediation they should be completed in a timely manner. There may be some issues which may bear greater scrutiny during the year, such as gift, travel and entertainment expenses which can be noted as well.
Three Key Takeaways
- Joint Venture present unique risks FCPA risks and must be managed accordingly.
- Your final report needs to consider the final viewer of the document, potentially the DOJ or SEC.
- Be sure to follow up on any red flags raised but not cleared and action items for remediation or additional scrutiny.
This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group. The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense. For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at firstname.lastname@example.org or check out www.volkovlaw.com.